Track 1 · Debits, credits and double entry
The chart of accounts
How a chart of accounts is organised, what account codes mean, and how to choose the right account for a transaction.
You will be able to
- Read the structure of a chart of accounts.
- Use account codes to find the right account.
- Choose specific accounts that keep reporting useful.
- Explain when detail belongs in a sub-ledger instead.
Builds on
A chart of accounts is the list of every account a business uses, each with a code, a name and a type. It is the filing system of the books: every journal line has to go to one of these accounts, and the financial statements are built by adding the accounts up.
Reading the codes
Codes are grouped so the type is obvious from the number. Accounting Quest uses a common four-digit scheme: the first digit tells you the element, and within each block accounts are listed in the order they appear in the statements — current assets before non-current ones, operating expenses before finance costs. Codes are spaced out (1000, 1100, 1200…) so new accounts can be slotted in later without renumbering, which is why you'll see 1310 Prepaid rent next to 1300 Prepaid insurance.
Choosing the right account
Use the most specific account that fits. Posting every cost to a single "General expenses" account balances the books but tells managers nothing about where the money went, and makes the income statement useless for spotting a rise in, say, utilities. Ask: what was this money actually for? Electricity and internet are utilities; fixing a broken door is a repair; printed flyers are advertising.
But don't go too far the other way. Creating a separate revenue account for every client, or a payables account for every supplier, makes the chart unmanageable. That detail belongs in a sub-ledger: one Accounts receivable control account in the chart, with a customer sub-ledger behind it listing what each client owes. The control account always equals the total of the sub-ledger.
Keep it consistent
Once an account is chosen for a kind of cost, use it every period. If April's internet is in Utilities and May's is in Office expenses, the comparison between months is broken. Many businesses write short notes in the chart ("6300 — electricity, water, internet") so everyone codes the same way.
| Codes | Type | Examples |
|---|---|---|
| 1000–1999 | Assets (current first, then non-current) | 1000 Cash at bank · 1100 Accounts receivable · 1350 Supplies · 1500 Equipment |
| 2000–2999 | Liabilities | 2000 Accounts payable · 2110 Salaries payable · 2200 Unearned revenue · 2500 Bank loan |
| 3000–3999 | Equity | 3000 Share capital · 3100 Retained earnings · 3200 Dividends declared |
| 4000–4999 | Income | 4000 Sales revenue · 4100 Service revenue · 4900 Interest income |
| 5000–5999 | Cost of sales | 5000 Cost of sales |
| 6000–6999 | Operating expenses | 6000 Salaries · 6100 Rent · 6300 Utilities · 6600 Advertising · 6800 Repairs |
| 7000–7999 | Finance costs | 7000 Interest expense |
| 8000–8999 | Income tax | 8000 Income tax expense |
One exception to watch for in this chart: 7100 Bank charges is an operating expense, kept next to interest because both come from the bank.
Practice
Practising as a guest — attempts aren't saved.
Exercise 1 · Classify
Using the numbering scheme above, what type of account is each code?
Exercise 2 · Classify
Lumen's April and May costs need coding. Which expense account does each belong in?
Exercise 3 · Journal entry
On 12 May the water company collects Lumen's April water bill, 45, by direct debit from the business account. Record the entry using the most specific accounts.
Exercise 4 · Journal entry
On 6 May Lumen pays 350 by debit card for a sponsored social media campaign promoting its design services during May. Record the entry using the most specific accounts.
Exercise 5 · Concept check
A bookkeeper posts every expense to one account called 'Sundry expenses'. The books still balance. What's the main problem?
Exercise 6 · Concept check
Lumen worked for nine different clients in its first two months, and Maya expects about 40 by the end of next year. She wants to see what each one owes. A new bookkeeper suggests adding a receivable account for every client to the chart (1101 Hollybrook, 1102 Kiln & Co.…). What's the better design?
Exercise 7 · Journal entry
Challenge: code this supplier invoice for Lumen. Record it as one entry, using the most specific account for each line.
Key points
- The chart of accounts lists every account with a code, a name and a type.
- Codes group accounts so their type is visible from the first digit.
- Use the most specific account that fits, and use it consistently every period.
- Customer and supplier detail belongs in sub-ledgers behind a control account, not in the chart.
Content review: answers and figures are checked by automated tests against the accounting engine, and the text has had an internal review against the standards; independent review by a qualified accountant is pending.